Print Money and Be Damned!

Japan was the world’s most admired economy in the ’80s. Then it was the world’s most despised economy in the ’90s. By 1995, economists pointed their fingers and laughed – the world’s most admired businessman had lost his left shoe.

But now, much of the world is barefoot. The US inflation rate has been going down since the early ’80s and was cut in half since last year. It now hovers barely above zero. Surely Japan – where prices have been falling for two decades – has something to tell us. As we pointed out last week, the Nipponese have been in decline for the last 20 years – with lower stock prices, falling real estate prices, and a falling GDP. Even the population has been sliding for the last five years

This week the Japanese decided to throw some more grit on the slope. Japan’s central bank governor, Masaaki Shirakawa, said he was boosting his “special loan facility” by 10 trillion yen, about $120 billion. And Mr. Naoto Kan, Japan’s Premier, said he would support the central bank, adding a “second pillar of stimulus’ of some 920 billion yen. The numbers always sound impressive in yen. But they are unlikely to give the economy much traction.

Professors Ken Rogoff and Carmen Reinhart studied 15 economic crises over the last 75 years. What they found was what you’d expect: real recoveries in the post-Keynes era are rare. Instead, in the 10 years following a crisis, economic growth rates are lower and unemployment is higher than in the years preceding the crisis. In two thirds of the episodes, jobless rates never recovered to pre-crisis levels, ever. And in 9 out of 10 of them, housing prices were still lower 10 years after the crisis ended.

“Our review of the historical record, therefore, strongly supports the view that large, destabilizing economic events produce big changes in the long-term indicators, well after the upheaval of the crisis. [Up to now,” the authors warn, “we have been traversing the tracks of prior crises. But if we continue as others have before, the need to de-leverage will dampen employment and growth for some time to come.”]

It was perhaps this scholarly warning that roused Shirakawa to action, with Ben Bernanke right behind. Neither wants to be known as the central banker who followed in the footsteps of losers. Urged on by sages and simpletons, they will print money. “It falls to the Fed to fuel recovery,” writes Clive Crook, one or the other, in The Financial Times. “Under the circumstances,” he writes, “better to print money and be damned.” At last week’s conference in Jackson Hole, Wyoming, the Americans promised to print more money, if needed. Shirakawa rushed home early so he could turn on the presses right away.

We would have more faith in central bankers if they had not been responsible for causing the crisis in the first place. Shirakawa joined the Bank of Japan more than 30 years ago. Ben Bernanke, an expert on the Great Depression, joined the Fed in 2002; he was standing at Alan Greenspan’s right side, with a pin in his hand, years before the bubble reached a crisis level.

“In a sense,” said Professor John Taylor, also at Jackson Hole, “the Fed caused the bubble.” That is, in the only sense that matters – they kept the key lending rate too low for too long. Now they are about to make another monumental mistake. No, two of them.

The first is already in progress. By promising the world extremely low rates for an “extended period” of time, they have created the exact conditions they wanted to avoid. President of the St. Louis branch of the Federal Reserve, James Bullard, explained that the Fed had unwittingly put the economy into an “unintended steady state.” The key rate cannot go any lower as prices sink; it is already at zero. It cannot go higher, either, not as long as inflation remains below the target. So, it does not move. The private sector has come to expect no policy response, Bullard concludes, “so nothing changes with respect to nominal interest rates or inflation.” As in Japan, the US economy remains in a coma.

The second major mistake is still ahead. Quantitative easing is a new weapon. It is not meant to kill dollar holders or bond buyers. It is intended merely to scare them with a little bit of inflation. But with the Fed’s QE shotgun staring him in the face, an investor may doubt the Fed’s promise to pull the trigger “just a little.” He will drop the dollar and US bonds and run. Inflation will soar.

Here at The Daily Reckoning, we have argued that it is coming…but not soon. Our opinion hasn’t changed. We’re just getting tired of waiting.

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

This calm before the inflationary storm is a blessing… savvy buyers will quietly accumulate gold and silver.

Bruce Walker

I can only laugh when the term “historical” is used to describe the most recent 75 years. The situation the United States finds itself in today is far more similar to the Spanish Empire 4 centuries ago than anything remotely like Japan of the 1980s.

And it has little to do with the nature of fiat money, though history going back much further than 75 years provides ample evidence of what we can expect next.

The similarity to Spain in the 17th and 18th centuries stems from the universal acceptance of both regimes currency. Just as Spain had a near unlimited supply of gold, so too has the United States had a completely unlimited supply of dollars.

In both instances, the reserve status of the nations currency along with nearly limiless supply of said currency, could only result in one outcome: The near complete extermination of the local economy by imports purchased abroad.

We can focus on the debt crisis, the financial crisis, or any number of other microeconomic phenomonen. But in the end, it is the reserve status of the dollar that has caused the current depression, and the only hope for any real relief lies in the failure of the currency itself.

If the currency failure is followed by the immergence of institutions that genuinely understand the importance of capital allocation in a productive society (as opposed to the current allocation that only benefits executive compensation) -then, and only then, can the seeds of economic recovery be planted.

But back to “history” again for a moment. Amongst those of us who collect world coins, anything struck since the year 1600 is considered “modern”. History is generally much better understood when viewed from the vantage of centuries. This is especially true when viewing and understanding the rise and fall of civilizations.

stan

When our currency is accounted for by looking at a countries holdings of..say treasuries, what is the process of accounting for..shifting or spending?
Lets say that a Chinese pension fund aquires a company ..POTASH.. for X Billion and in that purchase they use US treasuries.
Where would one find the shfting of holdings. Could it be that China has far less holdings than we think? If I were in their position, I would be happy to spend all that US FUNNY MONEY aquiring Natrural resourses and other companies. All the while keeping a political front by purchasing more each month…to make it look good. Any answers?

Dave Homan

Economists– especially Keynesians– and central planners would benefit from taking freshman physics. Newton demonstrated that for every action, there is an equal, opposite reaction. Economic machinations are not exempt from this law. One cannot easily measure the effects of individual Fed actions as easily as a freshman can demonstrate the effect of one ice skater pushing on another, but the effects of the economic actions still must be counterbalanced. In our current sorry state, less action would seem to be the wiser course.

R. D.Kemper

This point of view is one held in our family for the last few years. We have warned friends and family not to incur debt and at our earliest opportunity (2006) sold our house before the full impact of sub-prime was felt. I am merely a housewife, my husband a meat-cutter and we had two children still in school (one in university and one preparing to enter). Why then, were we able to see this crisis in the making when so many highly educated, highly trained, ‘in the loop’ economists, advisors and politicians were so blind?

Dwayne

YOU INSIDE, THIS IS A U.S. CITIZEN, PUT YOUR CREDIT CARD DOWN, AND COME OUTSIDE, YOU ARE UNDER ARREST.

Roland

Stan, if China has been on a buying spree, that would certainly be smarter than hanging on to all those USD.

But the problem with foreign properties is that there is little security of tenure without having some really serious military power-projection ability.

Otherwise, the title deeds are just paper when a third world gov’t decides to nationalize an industry. If you can’t send in the Marines to go topple that government, then your foreign investments cannot be very safe.

The only country in the world that has the power to keep its foreign assets safe is the USA. The USA also markets its enforcement services capability to its allies and partners. The investor classes in all countries are indirect beneficiaries of US-backed global enforcement services. That’s why global investors have not punished the USA for its economic follies–they’re propping up the “too big to fail” guarantor of all foreign investments!

However, this is a problem for China. If the Chinese begin to seriously rival the USA, then the Americans are unlikely to employ their enforcement services on China’s behalf. Instead, it wouldn’t be surprising if they install and support governments that are keen to nationalize Chinese investments.

It’s easy to imagine that after Chinese money builds a pipeline in central Africa, that some colonel or another topples the gov’t shortly after the work is finished, and takes it over with the stroke of a pen. The Chinese object furiously, but then the Americans praise the work of the new democratic government of …

So, unlike the Euros or Japanese, the Chinese might figure they need to build up their own global enforcement services sector. But that’s very expensive and the lead times are long. The USA would also, presumably, wish to preserve their present near-monopoly of the global enforcement services market.

a devils advocate

All I can say is run for it. There is nothing that this ship of state or the world state can do but blindly sail through the darkness until we hit the proverbial iceberg. If you think gold is going to save you there will be plenty of people that will gladly relieve you of that burden.

Bloomer

“the Nipponese have been in decline for the last 20 years – with lower stock prices, falling real estate prices, and a falling GDP. Even the population has been sliding for the last five years”… yes but job wise they have outperformed the U.S. hands down. Their current unemployment rate is 5% half of that as the U.S. I think the average American wants a job and couldn’t care diddly squat about the stockmarket, deficits or special loan facilities.

Crispus

Careful – IF gold becomes the only thing of value, the Government will surely seize it.

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